On March 24, the United States Attorney for the Southern District of New York (“NY”) issued a press release revealing that two people had been charged in connection with an alleged “Frosties” non-fungible token (“NFT”) scheme. Ethan Nguyen and Andre Llacuna, the individuals that launched the Frosties utility NFT collection, (herein, the “Defendants”) were arrested following a joint investigation conducted by the NY offices of the Department of Justice, Internal Revenue Service, Department of Homeland Security, and US Postal Inspection Service.
The underlying allegations against the Defendants should serve as a cautionary tale to those in the NFT industry. In particular, if minters sell utility NFTs, but refuse to follow through with advertised ownership benefits, they may face serious penalties, including incarceration.
The Frosties Utility NFT Collection
The “Frosties” NFT collection consisted of colorful and quirky cartoon ice-cream-scoop themed characters. Purchasers of Frosties NFTs were promised future rewards, including early access to a metaverse game. NFTs that offer “holders added benefits, such as reward programs, giveaways, and/or early access to events for NFT holders,” are otherwise known as “utility” NFTs. On January 9, 2022, the Frosties NFT collection launched on the OpenSea NFT Platform. Sales soon generated over one million dollars in cryptocurrency value. A few hours after the launch, however, both the Frosties NFT’s website and social media accounts disappeared, along with the value of Frosties NFTs.
Results of the Frosties Utility NFT Investigation
The United States Attorney for the Southern District of New York (the “US Attorney”) claims that the Defendants engaged in a “rug pull” scheme: a term used to describe “a project launching, garnering investment, and subsequently being shut down without delivering on its promises.” Allegedly, the Defendants advertised that Frosties NFT purchasers would receive certain benefits, but, soon after the initial sale, the minters proceeded to shut down the utility NFT project before fulfilling any such promises. In addition, the US Attorney believes that the cryptocurrency proceeds associated with the NFT sales were quickly transferred “to various cryptocurrency wallets under [the Defendants’] control in multiple transactions designed to obfuscate the original source of funds.”
For engaging in such alleged offences, the Defendants were charged “with conspiracy to commit wire fraud and conspiracy to commit money laundering, in connection with a million-dollar scheme to defraud purchasers of NFTs advertised as ‘Frosties.’” Each charge carries a maximum sentence of up to 20 years in prison.
Why Does This Matter for Your Business?
To avoid such charges, NFT businesses must understand the state and federal laws that apply to their business and advertising practices. The arrests of Nguyen and Llacuna are examples of how those that engage in fraudulent, deceptive, and misleading business practices may be on the receiving end of criminal charges associated with an NFT project. Given these risks, it is advisable to obtain guidance from attorneys experienced with NFT promotional advertising before offering utility NFTs for sale to the public.
Klein Moynihan Turco maintains an extensive practice in the fields of Internet and mobile marketing law, consumer data privacy law, sweepstakes and promotions law, fantasy sports and gaming law, intellectual property and general corporate law. If we can be of assistance, please visit https://kleinmoynihan.com or call us at (212) 246-0900.